Traditional portfolio accounting systems track account balances over time by using data pairs attributed to each account, each pair reflecting one of (a) the number of shares, (b) the share price or (c) a monetary value of an account plus the respective value date. This is sufficient for accounts where this information is confidently known at any single past and present value date. E.g. for a portfolio investing in stock exchange traded equity, the exact number of shares held of a given equity is known at any past and present point in time. Equally well known are one or a list of prices (e.g. offer, bid at one or multiple stock exchanges) of this share for each given past or present value date. The value of the portfolio position in our example for any given value date is derived by multiplying the number of shares held at this point in time (the value date) with the appropriate price known for this value date (one of the listed above or algorithmically derived of this list, maybe even in combination with some additional information like risk adjustment factors). However, an important example of where a traditional portfolio accounting system insufficiently models the business information and processes is the area of investments in alternative financial instruments, e.g. hedge funds or private equity. Final confirmed prices/values of these investments for a given value date, i.e. the price at which these investments are bought/sold, are only retrospectively known, e.g. 15 business days after their value date. On the other hand, estimate prices with a degree of fuzziness/uncertainty from different sources are often issued prior to the issuance date of the final price referring to the same value date. Many hedge funds are traded monthly, i.e. there is a trade/dealing date once a month at which investors can buy or sell shares of the fund. For this date, a final price at which investors can buy/sell is determined. The hedge fund manager may issue intermediate, e.g. weekly, prices or performance returns for his fund between the monthly final valuation dates. As he requires time to produce these intermediates, their issuance will typically, following the same time delay scheme as the monthly final trade prices, be a few days after the value date they are applicable for. For example, between the value date, say 30 January, and the issuance date of the final price, say 18 February, the hedge fund manager may issue one or two estimates of what the investment into the hedge fund was worth as of the value date 30 January. While the final value for 30 January is still outstanding, the hedge fund manager might on say 10 February issue an intermediate return for the period 30 January to 6 February. To determine the latest price of an investment into this hedge fund one has to apply this return on whatever latest estimate or final price is available for 30 January value date at the time of producing the portfolio (or investment position) value. I.e. the produced value of the investment position (and thus of the portfolio) at a given value date will depend on the time of production of this value.
A Fund of Hedge Funds (FoHF) manager runs one or multiple portfolios with each portfolio's assets invested into a number of hedge funds. The FoHF manager determines the value of his portfolio(s) by valuing its assets, i.e. investment positions and general ledger (cash, accruals, fx etc.). When buying/subscribing into or selling/redeeming investments into hedge funds, the FoHF manager places trades for a value date corresponding to a trade date of the underlying hedge fund. These trades may typically be fixed either by share or amount. From value/trade date up to confirmation of the final price by the hedge fund manager, these trades will reflect the change in the underlying price (either in their shares or in their value) as new estimates for the value date become available.
Handling this uncertain or fuzzy accounting information ultimately stemming from delayed issuance of confirmed (or final) pricing of the underlying alternative investments invested into is not possible with traditional portfolio accounting systems in a way that (a) balance sheets for a given value date and profit and loss statements for a given value period remain fully reproducible at whatever point in time these have originally been produced and may be published to investors or other parties (e.g. auditors) and (b) a full life cycle of any accounting information from first entry to final confirmation of both asset pricing and any other business transaction is fully accessible and (c) for (a) any view at a balance sheet for the same value date and any view at profit and loss statement for the same value period is both accessible and provided by the system in the same way and for (b) any information state over the price life cycle or other business transaction life cycle is both accessible and provided by the system in the same way.